Sanctions on Syria unlikely to significantly impact international oil markets

Syria has recently become the target of tightened international sanctions prohibiting its oil exports to the United States and European Union. While Syria and Libya are both Mediterranean crude oil producers undergoing major political strife, differences in the amount of oil they produce and export, its quality, and the scope of the disruption all suggest that the situation in Syria, in contrast to that in Libya, is unlikely to have a significant direct impact on world oil markets.

Syria's oil output of less than 400,000 barrels per day (bbl/d) in 2011 makes it the only significant oil-producing country in the eastern Mediterranean, but still a relative minnow compared to Libya's pre-unrest total oil production of over 1.7 million bbl/d. Estimated net crude oil exports from Syria were only 109,000 bbl/d in 2010, far less than those from Libya (1.5 million bbl/d in 2010). More than 90% of Syria's oil exports went to countries in the European Union (E.U.), with Germany, Italy, France and the Netherlands as the largest buyers. But while crude exports to the E.U. thus provided 30% of Syrian government revenues in 2010, they made up only about 1% of E.U. petroleum demand, European Commission data show. This contrasts with Italy's approximately 20% dependence on Libyan crude oil imports last year. Unlike Libya's crude, which is light and sweet and for which there are few readily available substitutes, the bulk of Syria's crude oil is relatively heavy and sour.

Various U.S. sanctions against Syria were enacted starting in 2004, including the Syria Accountability Act (SAA) of 2004, which prohibits the export of most goods containing more than 10% U.S.-manufactured component parts to Syria. Other sanctions include measures against the Commercial Bank of Syria resulting from the USA Patriot Act and various Executive Orders denying certain Syrian citizens and entities access to the U.S. financial system due to their participation in proliferation of weapons of mass destruction, association with Al Qaida, the Taliban or Osama bin Laden, or destabilizing activities in Iraq and Lebanon. Until recently, U.S. measures did not specifically target oil exports, though they may have hampered Syrian efforts to arrest a decline in domestic crude production by reducing opportunities for exploration and production partnerships with foreign companies.

In response to the indiscriminate use of deadly force against dissent by Damascus, U.S. sanctions on Syria were extended on August 18 to include a ban on the import of crude oil or petroleum products of Syrian origins. Prior to the new round of U.S. sanctions, the United States infrequently imported crude oil, and only a small amount of refined products, from Syria. More significantly, on September 2, the E.U. followed suit with its own ban on imports of Syrian oil. This ban, which is set to take effect next month, is designed to deprive Syria of oil revenue and looks bound to further hinder its efforts to revive its oil production and expand its ailing petroleum industry. The E.U. sanctions will prevent roughly 100,000 bbl/d of mostly heavy, sour Syrian crude exports from reaching their traditional European markets. U.S. sanctions will preclude that oil from being redirected towards the United States.

European importers of Syrian crude will need to source alternative supplies, which could indirectly affect U.S. sour crude markets. Recently, sour crude markets in Europe have shown exceptional strength, with prices for Russian Urals, one of the region's main sour crude streams, swinging to an unusual premium to those for light, sweet Brent. Following reduced loading programs at Russia's Baltic Sea port of Primorsk, a key Urals export terminal, the sanctions may further support this Urals premium. Sanctions targeting Syrian exports, however, may not necessarily disrupt Syrian crude production, which so far, in contrast with the situation in Libya, has been unaffected by civil unrest. Should Syria continue to produce crude, the effects of sanctions will be different than if that crude was taken off the market altogether. Syrian exports will likely find other markets, possibly in Asia, where they might help replace exports from Yemen disrupted by civil unrest.

While the situation in Syria raises many concerns, its direct implications for international oil markets are of a different order of magnitude than those surrounding the situation in Libya that was most recently reviewed last week.